Hello,
512 MB is fine for the low-end consumer that the iMac is targeted at. If you just browse the Internet, write letters, play some music, and just tinker for fun, then 512 MB is plenty (if you don't demand the best performance).
For the needs you mention, you really should have 1 GB of RAM minimum.
And, personally, I would install 2 GB of RAM.
I wouldn't buy it from Apple with the computer though. You'll spend considerably more for it from Apple.
Buy the machine with the stock memory, and then buy the memory at a lower price at a good Mac company.
I buy all my memory from Other World Computing. Their stuff is top-notch, and the price is much lower than Apple's.
http://www.macsales.com
For the needs you mention, you will most definitely see an improvement (significant) between 512 MB and 1 GB.
I've worked with 256 MB, 512 MB, 1 GB, and 2 GB for video editing on the iMac G5 systems. And, I found that 1 GB is where things start getting acceptable. And, for my use, 2 GB is where things got perfect.
I hope this helps.